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Right now, everyone is worried about inflation, from employers who can't find workers or raw materials to employees whose real wages aren't keeping up with inflation. We'll use this as an instance to demonstrate why inflation has hit the developing world the hardest. We'll also talk about the U.S. dollar and how to maintain your savings safely.
Why does inflation happen?
People often look to which has the fifth-largest economy in terms of dollars as a good indicator for emerging markets. In June, it went up to 7.01 percent, the second-highest rate in Asia after Thailand. People in towns and rural areas find it harder to make a living as prices increase. We look into the hidden reason why prices are going up.
Imports the most fuel than any other country in Asia, which is good for its economy. Even before Russia attacked Ukraine, the World Bank reported that petroleum accounted for 30% of total imports, about twice as much as China's.
This number comes from the prices of coal, crude oil, and natural gas, which have increased significantly since the war started as European countries looked for ways to get energy other than Russia. Even though the West has sanctions on Russia, it has bought 3 times as much oil from it.
But cheaper imports have only partially made up for the country's rising costs on international markets, where energy and goods are priced in U.S. Dollars. Food prices have increased, like in many other places, because of the fighting in Ukraine. Compared to the Dollar, the Rupee was worth an all-time low of 80.21 Rupees for every Dollar on July 14.
But the Rupee isn't the sole currency with problems like this. As the value of the Dollar has gone up, the value of other major currencies has gone down. On the same day, the Yen and the Euro fell to their lowest levels in 24 and 20 years, respectively. Since the beginning of the year, the Yen and the Euro have lost 17% and 11% of their value against the Dollar, respectively.
A Theory for a Dollar Milkshake
The way the economy works is a big reason why the Dollar has been going up. The Federal Reserve has more space to raise interest rates to slow inflation now that the U.S. economy is doing well. This happened when the Japanese Central Bank said it would keep its interest rates artificially low to increase inflation.
Because it has to maintain a low yield on Italian government bonds, the European Central Bank can't even fight inflation the same way it would like. After Russia invaded Ukraine, the financial markets became less willing to take risks. This was also good for the Dollar. Some people have said that the strength of the Dollar keeps itself going like a doom loop.
A rising Dollar stresses the rest of the world since it makes food and energy imports more costly and makes it harder for emerging markets to pay their Dollar-denominated debt. Yet, as the global economy slows, investors tend to place their money in the U.S. dollar, which boosts it. The $1 Milkshake idea is another name for this one.
The Dollar's Power in Context
Even though the Dollar has gained 19% versus a group of exchange values since January 2021, it remains behind its all-time high, set in February 1985. The U.S. Dollar Index (DXY), which compares the U.S. currency to a basket of foreign currencies, peaked at 164.72 points at the time and is now at 106 points.
At the time, the world's largest central banks worked together to make the Dollar less valuable. This was made official by the Plaza Accord. People in other countries had a hard time back then, just like they do now.
What Could Slow the Dollar?
Most people who keep an eye on the market don't think the Dollar will get weaker soon. Part of this is that the Euro, the Japanese Yen, and the British Pound face big problems. In his Jackson Hole speech, Fed Chair Jerome Powell reiterated his commitment to bringing inflation back to the 2% target by hiking interest rates and keeping them high for longer.
He also knew this would slow down the economy and cause more people to lose their jobs, making it harder to find a job. According to several experts, the Dollar will only lose significant value against other major currencies if the Ukrainian issue is resolved or the Fed changes its policies to be more dovish.
As Europe enters autumn and temperatures fall, an escalation of Russia's energy war on the continent will likely reinforce these underlying patterns, strengthening the Dollar relative to all other currencies.
How to Protect Yourself from Inflation
If you think the U.S. dollar will keep going up against other currencies, buying dollar exposure is the best way to protect oneself from inflation. If you have stocks in emerging markets, you may wish to reduce the danger by holding dollars instead.
You could also short an investment exchange-traded fund to take advantage of the weak spot of international stocks and currencies. If you're interested in Forex, you could trade Agreements for Difference (CFD) on currency pairs through an online broker.
If you think the Dollar will continue to rise against the euro, you could buy the USD/EUR pair today and sell it later to lock in your profits. Lastly, you could put your money into any gold. People have liked jewelry, coins, and bars made of gold for a long time.
But when traded, it often goes for more than was valuable on paper. You could instead buy stock in a company that mines gold, like Wheaton Precious Metals or invest in an exchange-traded fund that owns real gold.
Because so many major gold stocks are trading near their lows from 1999, they are cheaper now than they were then. No matter what you do, it would help if you always remember that trading is dangerous. Leverage also can make both your possible gains and losses bigger.
Because of this, you shouldn't make investments with more cash than you can handle losing. But it's also important to remember that doing nothing and leaving your money in a savings account when inflation is high isn't risk-free either because you'll lose purchasing power.
